While the frozen short-term market leaves many jurisdictions searching for funding alternatives to help meet immediate cash-flow needs, Puerto Rico officials said the island has the liquidity in place to ride out current market instability and wait for better borrowing rates.
The Government Development Bank for Puerto Rico, the commonwealth's financing arm, will postpone two transactions originally set for this month, a $1 billion tax and revenue anticipation note deal with Wachovia Bank NA as underwriter and a $400 million new-money Puerto Rico Municipal Finance Agency sale with Merrill Lynch & Co. as book-runner.
GDB president Jorge Irizarry said the commonwealth will hold off on the borrowings until market conditions improve. The island typically sells $1 billion of Trans every year in the fall, yet because a syndicate of banks, led by the Bank of Novia Scotia, provides a $1.1 billion line of credit to the program, Puerto Rico will continue to get needed cash from the syndicate and refinance that loan at a later date.
"We are holding off until we see some more stable or normalized conditions," Irizarry said. "But, we're not in the same position as California and Massachusetts, that are kind of scrambling because we have now for years had our Trans in two different modes. We have in place for several years now a line of credit from a syndicate of banks."
In looking at the $400 million PRMFA sale, those bond proceeds go to reimburse the GDB for loans that it has extended to municipalities. The island sells PRMFA bonds every two to three years, with property taxes securing the debt. Irizarry said the GDB can wait on its reimbursement.
While GDB officials favor eventually heading back to the market to refinance both of these programs, Puerto Rico can wait as the Trans loan doesn't need to be repaid until July 31, the end of fiscal 2009. Along with the Bank of Novia Scotia, the banking syndicate includes KBC Bank, Wachovia, Banco Popular, Banco Bilbao Vizcaya Argentaria, and Bariba Bank.
"Usually we prefer to [refund] because we're going to get a more attractive rate, but in this market that's not even necessarily the case if you have [New York's Long Island Power Authority] paying 6.25% for a 30-year bond," Irizarry said. "When we go to the market, we've never experienced a rate like that and we can just hold this at GDB on a long-term basis if we needed. And with the Trans line, it's a line that works just like the Trans and it's payable at the end of the fiscal year ... and hopefully when we refinance it we'll get even a better rate, a fully tax-exempt rate."
In addition to that credit line, the GDB has the authority and the liquidity to extend loans to the central government to help shore up a $1 billion funding gap in Puerto Rico's $9.48 billion fiscal 2009 operating budget. Officials anticipate extending $500 million through the end of 2008. The commonwealth plans to repay the GDB by leveraging delinquent tax receivables once market conditions improve.
GDB officials are also working on two existing Lehman Brothers Special Financing Inc., swaps that the commonwealth is hoping Barclays Capital Inc. will become counterparty on. Barclays acquired Lehman's broker-dealer business and its trading and investment business after LBSF's parent, Lehman Brothers Holdings Inc., declared bankruptcy.
"To us it would make business sense for Barclays to assume those positions because they're key to the municipal issuers," Irizarry said. "If they want to step in to Lehman's shoes and keep the client base, they should also support the derivative book because if they don't then, in our case we're going to switch to others. And, we may not necessarily be doing any business with Barclays and so in that sense if they're interested in municipal clients, they should support the derivative book. But we'll see we don't know."
Puerto Rico does have other counterparties lined up, ready to replace Lehman if Barclays chooses not to become counterparty on the swaps. Officials declined to say which banks in particular have committed to the possible swap transactions.
"What we can tell you is that our policy is to have counterparties that are rated double-A and better," said GDB's executive vice president and financing director, Luis Alfaro.
In both of the swap transactions, the island pays a fixed rate and receives a floating rate based on the London Interbank Offered Rate. One swap is attached to $218 million of Libor-based bonds that the Puerto Rico Sales Tax Financing Corp. sold in early July in its $2.6 billion Series 2007A sale.
To create a synthetic fixed rate on the bonds, the corporation pays Lehman a fixed rate of 4.9% and in return receives 67% of three-month Libor plus a per annum spread equal to 93 basis points, according to the deal's official statement. The mark to market value on that swap is approximately $39 million, according to Standard & Poor's analyst Horacio Aldrete.
The second swap is attached to Commonwealth's 2004B general obligation bonds and has a notional amount of $218 million. The official statement does not specify the percentage of Libor or the fixed rate and the GDB declined to provide the information "as this is a contract between two parties."